* First Amendment protections not absolute -- judge
* Thornburg went bankrupt in 2009
By Jonathan Stempel
Nov 25 A federal judge has said credit ratings
are not always protected opinion under the First Amendment, a
defeat for credit rating agencies in a lawsuit brought by
investors who lost money on mortgage-backed securities.
The Nov. 12 decision was a little-noticed setback for
McGraw-Hill Cos' Standard & Poor's, Moody's Corp's Moody's Investors Service and Fimalac SA's
Fitch Ratings, which have long invoked First Amendment free
speech protection to defend against lawsuits over their
These agencies had argued that the Constitution protected
them from claims they issued inflated ratings on more than $5
billion of securities issued in 2006 and 2007, and backed by
loans from former Thornburg Mortgage Inc and other lenders.
But the judge said the ratings were shared with too small a
group of investors to deserve the broad protection sought.
"The court rejects the rating agency defendants' arguments
that the First Amendment provides any protection to them under
the facts of this case," U.S. District Judge James Browning in
Albuquerque, New Mexico, wrote in a 273-page opinion.
Browning nonetheless dismissed claims accusing Moody's and
Fitch, but not S&P, of misrepresentations, saying the investors
did not adequately allege that the two agencies did not believe
their ratings, or knowingly concealed their inaccuracy.
He also said federal law preempts some arguments that the
investors used to recover under New Mexico securities law.
The judge said the investors may file an amended complaint,
which had sought class-action status. If the state law claims
went forward, it could provide an avenue for investors to go
after the agencies in other states.
Browning had denied the agencies' motion to dismiss the
complaint on Sept. 30, without giving reasons.
S&P, in a statement, called the First Amendment ruling
"inconsistent" with other court rulings. Fitch spokesman Daniel
Noonan said that agency is pleased that claims against it were
dismissed. Moody's and lawyers for the investors declined to
comment or had no immediate comment.
Credit Suisse Group AG and Royal Bank of Scotland
Group Plc are among the other defendants in the case.
Rating agencies have been widely faulted by investors,
regulators and Congress for contributing to the global credit
and financial crises that began in 2007 by issuing high ratings
on debt that did not deserve it.
Thornburg made "jumbo" home loans, larger than $417,000, to
borrowers considered good credit risks, but collapsed after
margin calls and a plunge in the value of mortgages it held.
The Santa Fe, New Mexico-based lender filed for bankruptcy
on May 1, 2009, and is now called TMST Inc .
Investors led by two pension funds, the Maryland-National
Capital Park & Planning Commission Employees' Retirement
System, and the Midwest Operating Engineers Pension Trust Fund
in Illinois, claimed the agencies issued false and misleading
investment-grade ratings for Thornburg securities, and were
paid "substantial" sums that compromised their independence.
But Browning said the ratings were distributed only to a
"limited group" of investors, not the public at large.
He also said that unlike publicly traded companies, the
trusts from which the securities were issued were not "public
figures" entitled to more protections.
"The court rejects the rating agency defendants' argument
that the First Amendment protections regarding provably false
opinions apply to their credit ratings," Browning wrote.
Rating agencies have largely been successful in raising the
First Amendment defense.
For example, in September, a federal judge threw out a
lawsuit by then-Ohio Attorney General Richard Cordray on behalf
of pension funds, and said ratings were "predictive opinions."
In contrast, a Manhattan federal judge, in a 2009 ruling
involving Morgan Stanley , said the defense does not
apply when ratings were provided to a "select group of
investors" in a private placement.
S&P has asked the U.S. Securities and Exchange Commission
not to file threatened civil charges over its ratings for a
2007 offering, Delphinus CDO 2007-1.
The case is Genesee County Employees' Retirement System et
al v. Thornburg Mortgage Securities Trust 2006-3 et al, U.S.
District Court, District of New Mexico, No. 09-00300.